EUROPEAN Union chiefs yesterday ordered the Government to take drastic action to stop Britain’s house prices spiralling out of control.

A report on the eurozone crisis from the European Commission warned that increasing property costs were threatening to massively increase household debt levels and trigger a new economic meltdown.

The economic recovery was being put in jeopardy by “the destabilising impact of high and volatile house prices and high household debt”, the report said. It added that ministers needed to act quickly to increase the supply of housing to stop property prices soaring.

The report urged the Government to pursue further reforms to the mortgage and rental markets, financial regulation and property taxation to prevent “excessive volatility and distortions” in the housing market. Britain’s long-term economic growth was also being put at risk by the high number of school leavers with “very poor” writing and numeracy skills, it added.

Ministers needed to “take measures to reduce the high proportion of young people leaving school with very poor basic skills”.

We should not be taking orders from these people

Deputy leader of the UK Independence Party Paul Nuttall

Treasury officials yesterday welcomed the report as a vote of confidence in Chancellor George Osborne’s drive to slash the Government’s record deficit.

In a report on the performance of all 27 EU member states, the Commission said: “The high levels of household debt accumulated over the past decade are linked closely to high house prices and represent an important imbalance in the UK economy.”

Highly indebted households were “vulnerable to rises in interest rates or unemployment, with potentially destabilising effects on the economy at large”.

It warned: “While there are few indications that housing demand or interest rates would surge in the near future, the insufficient and rigid supply of housing in the UK exposes the country to higher and volatile house prices.”

The report said Britain’s “noticeable under-performance” regarding external competitiveness and export developments deserved attention. And, turning to skill levels, it added: “There is a persistently large number of functionally illiterate and innumerate adults in the UK, usually with no qualifications.” It also criticised the lack of “high-quality affordable childcare”.

A Treasury spokesman said: “The European Commission said the UK should fully implement the budgetary strategy for 2012/13 and reinforce the budgetary strategy for 2013/14 and beyond.” He said this showed its backing for Britain’s plans to deal with its debts.

But critics of the EU were infuriated by the Commission’s latest attempt to meddle in the British economy.

Paul Nuttall, deputy leader of the UK Independence Party, said: “When you start taking economic advice from the European Commission, you may as well check yourself into the funny farm. We should not be taking orders from these people.”

Rachel Reeves, Labour’s shadow chief secretary to the treasury, added: “Without urgent action to get our economy moving again, the Government will cause long-term damage and won’t succeed in getting the deficit down.”